US treasuries are seeing action we have not seen for a while: Strong sharp steepening of the yield curve.
The yield curve is said to steepen when the spreads between short-term and long-term rates increases. The yield curve flattens when spreads shrink.
- A bearish steepener occurs when rates are rising and long-term yields are rising more than short-term rates. Spreads widen.
- A bullish steepener occurs when rates are falling and short-term rates are falling faster than long-term rates. Spreads widen.
- A bullish flattener occurs when rates are falling and long-term rates are falling faster than short-term rates. Spreads narrow.
- A bearish flattener occurs when rates are rising and short-term rates are rising faster than long-term rates. Spreads narrow.
The terms bearish and bullish refer to capital gains (bullish) or losses (bearish) if one is invested in government bonds.
Bearish Steepener Meaning
A bearish steepener is generally a sign that market participants believe the economy is getting stronger and the Fed (Central Bank), will be hiking rates faster than previously anticipated or more than anticipated.
What Happened Today?
- The housing market was stronger than expected: Housing Starts Jump More Than Expected: Economy Overheating?
- The current account deficit shrank more than expected: Current Account Deficit Shrinks Due to Hurricanes
June Rate Hike Odds
- The Fed Funds rate is currently 1.25% to 1.50%
- The odds of two quarter point hikes through the June meeting increased from 32.5% yesterday to 38.1% today. This is consistent with the bearish steepening of the yield curve.
I did not believe the Fed would hike as much as expected in 2018, and today does not change my mind.
By Mike "Mish" Shedlock